SAJC 2023 JC2 H2 Standard of Living & Macroeconomic Indicators Lecture Notes

Standard of Living SAJC/2023/JC2/H2 1 ST ANDREW’S JUNIOR COLLEGE JC2 H2 ECONOMICS 2023 1 INTRODUCTION TO MACROECONOMICS 3 1.1 Macroeconomics vs Microeconomics 3 1.2 Economic Goals 4 1.3 Standard of Living and Macroeconomic Goals 5 1.4 The Circular Flow of Income 8 2 KEY MACROECONOMIC INDICATORS 15 2.1 Key Macroeconomic Indicators and Macroeconomic Aims 15 3 INDICATOR OF ECONOMIC GROWTH 17 3.1 National Income Statistics 17 3.2 Uses of National Income Statistics 22 3.3 Limitations of GDP Statistics as an Indicator of Economic Welfare 23 3.4 3.5 Alternative Measures of Welfare / Standard of Living Summary 32 34 4 INDICATOR OF PRICE STABILITY 35 4.1 Inflation Rate 35 4.2 The Consumer Price Index (CPI) 37 5 INDICATOR OF UNEMPLOYMENT 40 5.1 Unemployment Rate 40 Standard of Living and Macroeconomic Indicators Theme 3 provides students with an overview of the workings and linkages of the national and international economy. Students will use the concepts, theories and principles from Themes 1 and 2 to examine the problem of scarcity of resources and the concept of tradeoffs at the national level. In particular, students will examine how governments make policy choices at the national level to improve living standards. In doing so, students will discuss how governments consider competing needs, weigh costs and bene fits, recognise tradeoffs and consequences to make policy decisions. Students will first gain an understanding of the circular flow of income model and concepts of AD -AS, before applying the concepts to analyse macroeconomic issues and government decisions at the national level. Students will also examine domestic and external factors that influence economic growth, price stability, employment and balance of trade, with a focus on how these factors affect a country’s standard of living. Additionally, students will also discuss the different policy choices available to governments and their effectiveness in achieving higher living standards.

Standard of Living SAJC/2023/JC2/H2 2 6 BALANCE OF TRADE 42 6.1 Inflows and Outflows 42 6.2 Structure of Balance of Trade 42 6.3 Balance of Trade as a Key Indicator 43 7 8 CONCLUSION APPENDICES Appendix A Appendix B Appendix C Appendix D 44 46 46 48 51 53 Reading List and Reference • Economics, John Sloman, 8th ed., pp 403-414, 426-432, 433-438, 446-4484, 457-461 • Essentials of Economics, John Sloman, 5th ed., pp 234-249, 264-270, and 438-439 • Economics, Roger A. Arnold, 6th ed., pp 131-132, 138-143, 154-173, 771-779 • Introduction to Economics, M. Lieberman & R. E. Hall, 2 nd ed., pp 362-378, 385-388, 399-401 • For statistics on the Singapore economy, refer to www.singstat.gov.sg For global perspective s, refer to http://data.worldbank.org, http://www.imf.org, http://www.tradingeconomics.com • Economic Review, Vol. 28 No. 2, ‘The Standard of Living’, pp30-33 • Economic Review Vol. 28 No. 4, ‘Measuring Human Development’, pp6-10 • Economic Review Vol. 28 No.3, ‘GDP, Deficit and the Hidden Economy’, pp 2-4 • Economic Review Vol. 31 No.1, ‘The UK Economy. How do we Judge its Performance?’, pp5-9 • Economics Today, Vol. 20 No. 4, ‘Trends in Unemployment?’, pp7-9 • Economics Today, Vol. 21 No.1, ‘Should Developed Nations Pursue Happiness rather than the Pace of Economic Growth?’ pp22-26 Learning Objectives At the end of this section on Key Economic Indicators, students should be able to: 1. explain the circular flow of national income involving households, firms, government and the foreign sector. 2. explain the significance of each of the key economic indicators as a measure of economic performance. 3. interpret statistical data for each key economic indicator. 4. use the key indicators to assess the economic performance of an economy and make international and inter-temporal comparisons. 5. analyse the limitations of using the indicators to measure economic performance as well as the standard of living of an economy across time and space.

Standard of Living SAJC/2023/JC2/H2 3 1. INTRODUCTION TO MACROECONOMICS 1.1 Macroeconomics vs Microeconomics Macroeconomics is a branch of economics that deals with the structure, behaviour and performance of a national or regional economy as a whole. In it, we analyse the national output or income of a country instead of examining the actions of individual firms and households in specific markets . In examining the behaviour of the economy as a whole, we use the aggregate levels of demand or supply of the entire economy. Let us use the demand and supply framework as an illustration of the difference between Microeconomics and Macroeconomics. In Microeconomics, we focus on individual markets. It studies the demand for and supply of a particular good to determine its equilibrium price and level of output in the market 1. Examples include the markets for cars, oil, tea, airline services, etc. In Macroeconomics, however, we look at aggregate demand (i.e. the total value of goods and services demanded in an economy at each general price level) and aggregate supply (i.e. the total value of goods and services that producers are willing and able to supply in an economy at each general price level). The Aggregate Demand (AD), together with Aggregate Supply (AS) determines the general price level and the country’s national output. This is illustrated in Figure 1 below. The equilibrium level of real national level of income (0Y) and general price level (GPL) facing an economy is where AD = AS. An understanding of the workings of the macroeconomy allows us to better understand how the government formulates policies for the economy to achieve its macroeconomic objectives. 1 Recall: Determination of equilibrium price and quantity of a good or service in Chapter on ‘Demand, Supply and Price Determination’. General Price Level Aggregate Supply (AS) Aggregate Demand (AD) GPL Y Figure 1: AD/AS Model Real National Income 0

Standard of Living SAJC/2023/JC2/H2 4 In this lecture series, we will study the significance and importance of the respective macroeconomic goals and the various policies that can be put in place by the government to achieve these goals. We will also examine the issues and consequences when these goals are not attained and the implication on the role of the government in managing the macro economy. 1.2 Economic Goals Economists classify the goals of an econ omy under two categories: microeconomic goals and macroeconomic goals. 1) Microeconomic Goals a) Efficiency in Resource Allocation An economy seek s to attain economic efficiency , which comprises allocative efficiency and productive efficiency , in an attempt to deal with the problem of unlimited wants and limited resources. b) Equitable Income Distribution The Government also aims to achieve a more equitable income distribution a s severe income inequality 2 would mean that a large segment of the population cannot afford basic needs of shelter, food , education and health care while a small segment is living in the lap of luxury. 2) Macroeconomic Goals The key macroeconomic aims refer to the goals that a government hopes to achieve in the management of its macro economy. a) Sustainable and Inclusive Economic